Impact Investing in Mexico Reality Check, Challenges, and Opportunities

Transcription

1 Conference Proceedings Impact Investing in Mexico Reality Check, Challenges, and Opportunities U.S.-Mexico Chamber of Commerce, Northeast Regional Chapter New York 30 October

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3 Introduction On October 30, 2015, A.T. Kearney s New York office hosted a conference on behalf of the United States-Mexico Chamber of Commerce Northeast Chapter (USMCOC-NE) to discuss the ways that collaborative impact investment can advance positive and concurrent economic, social, and environmental change in Mexico. This was the seventh conference in a series of such events jointly conducted by A.T. Kearney and USMCOC-NE. Previous topics have addressed social impact companies and projects, Mexico s optimal positioning as a near-shoring destination, its role in NAFTA-centered supply chains, and its competitiveness in the global economy. The conference sparked a compelling discussion about the ways that impact investing can realize an explicit, dual goal in Mexico: the achievement of financial and economic gains for investors and significant improvement of social or environmental situations for the country and its people. Participants heard from a distinguished panel of entrepreneurs, investors, and philanthropists who shared their experience and views on impact investing. They described investment models currently used in Mexico, tangible results to date, and the role of the social entrepreneur in the investment ecosystem. At the heart of the day s discussions was the acknowledgement that impact investing will only truly benefit Mexico s society, a large portion of which lives at or below the poverty line, if such programs address the country s many challenges. Mexico s unequal income distribution, its low rankings on the Yale Sustainability Index, and its lack of technology development led to two important conclusions. First, impact-investment programs must encourage collaboration and innovation across the public and private sectors and civil society. Second, successful investors in this realm will understand that target segments may differ vastly in their sophistication. Mexico s technology sector, for instance, is led by well-educated entrepreneurs tightly connected to the digital global economy, while other sectors have never captured technology s benefits. This paper summarizes the conference s discussions, including responses to the questionand-answer session that followed. 3

4 The Panel on Impact Investing in Mexico Panelists: Mary Rose Brusewitz, Partner and Chair of International Practice, Strasburger & Price LLP Raúl Solís, Head of Investment Banking, Nacional Financiera (NAFINSA), a Mexican development bank Dr. Francisco Barnés Reguiero, Executive Director, Mario Molina Center Marc Diaz, Managing Director, NatureVest (Nature Conservancy) Brian Cox, President, MFX Solutions, Inc. Fernando Albertorio, CEO, Sunu After a brief welcome and introduction to the day s program by USMCOC-NE executive director Alejandro Ramos, A.T. Kearney partner Ricardo Haneine introduced the conference s theme: How can impact investing advance per capita income growth, economic and social development, and a healthier, higher quality environment? The panelists each addressed this theme by describing their organizations and their activities, and how they relate to impact investing in Mexico. Mary Rose Brusewitz, Strasburger & Price, LLP While the concept of market-based solutions to help the world s poor is not new, a growing range of such solutions means activity is increasing quickly in this area. Impact investing is also known as double or triple bottom-line investing, which refers to the intentional, multiple financial and social goals of the investment. Like microfinance, impact investing is both time and legal intensive. Lending in most countries is regulated, and many institutions form a separate arm such as a foundation to handle social-investment transactions. There are calls for greater attention to governance at this point in the evolution of social investing. The goal is to clarify investment intentions, as well as establish metrics and reporting on a specific program s impact. Many groups, such as the Stanford Center for Social Innovation, are developing a set of metrics. Similarly, Brusewitz is working with a group of lawyers to establish standards for different transactions. As examples, she referred to the lack of clear guidance on how to issue subordinated debt or how to handle withholding taxes. Productive use is an aspect of impact investing that is important and common to social investing overall. Consumer financing for a home refrigerator, for instance, does not generate a wider good in and of itself, but if that loan provides the appliance that enables a worker to make and sell sweets in a local market, that is productive use in its delivery of benefit to the family and the overall economy. Brusewitz believes that the challenges for social investing in Mexico right now revolve around excessive indebtedness at the bottom of the class pyramid, competition from mainstream lenders, and withholding taxes. Finding ways to work with government can help overcome these challenges. 4

5 Raúl Solís, NAFINSA As one of Mexico s largest development banks, NAFINSA s goal is to promote industrial development. It supports and structures project financing, working in collaboration with commercial banks. NAFINSA is the leading bank in the transformation of Mexico s energy sector, now that its monopolies have been broken up and the market is opening to competition. Among the largest energy companies it works with are three natural gas pipelines and a $4.5 billion petrochemical facility. The bank fosters innovation as well. As of June 2015, NAFINSA s portfolio of loans for renewable energy amounted to nearly 8 million pesos and included three wind farms, a photovoltaic farm, a mini-hydroelectric plant, and a cogeneration plant. To attract financing to such projects, the bank was a founding shareholder in 2006 of a fund of funds (FoF), The Mexican Corporation of Investments in Equity. NAFINSA works alongside three other founding development banks Fondo de Capitalización e Inversión del Sector Rural, Bancomext, and Banobras in supporting the FoF, which seeks to increase levels of venture capital and private equity in the country. Mexico lagged behind other developing nations in these types of investments in the past. Since its founding, the FoF has grown exponentially and now has more than 450 participating firms. Solís says his role ideally is to ensure that no project related to impact investing lacks the required debt or equity. Young companies seeking financing in the public markets may benefit from the FoF s MIDAS program (the Institutional Market Program for Alternative Corporate Debt), which provides entrepreneurs with guarantees that put them in a position to negotiate better loan terms from commercial banks. Beyond financing, MIDAS also promotes the institutionalization of operations and diversification of funding sources for emerging enterprises. The FoF proactively supports impact investing through its Fondo México Próspero. This fund seeks investments for social enterprises, such as the New Energy Program, which converts vehicles from gasoline to natural gas. Once the program is fully operational and reaches its optimal conversion rate, the impact could be 1 to 2 percent of Mexico s gross domestic product. Dr. Francisco Barnés Reguiero, Mario Molina Center for Energy and the Environment The Molina Center is an independent, non-profit organization founded 10 years ago by Nobel Laureate Mario Molina to engage in collaborative research related to energy and the environment. The center also contributes to policy making in the public and private sectors and to the training of future leaders committed to environmental issues. At the core of its mission is helping Mexico achieve energy security and improve air quality while not compromising economic growth. Since 2012, when Mexico passed the General Climate Change Law (LGCC in Spanish), which sets targets for air quality, the center has analyzed the law in the context of growing demand for energy and the availability of greener alternatives. The LGCC requires a 40 percent reduction in carbon emissions by 2020 and a 35 percent share of energy to be generated via renewable technologies. In turn, the center has asked policy makers to align their climate-change actions with four principles of green growth: 5

6 1. Minimize system-wide risk and structural imbalance from shifting climate patterns. 2. Reduce greenhouse gas emissions to mitigate climate change. 3. Create a climate-resilient, low-emission, robust economic platform. 4. Generate incentives and an institutional and legal framework to drive investment and innovation. The center notes that, historically, greenhouse gas emissions move in tandem with economic growth. Massive investment in renewables, such as wind and solar, is essential and will bring health benefits and lower energy costs. Actions such as stopping methane leakage and switching to cleaner fuels including natural gas also will pay multiple dividends. In reducing consumption, energy costs will decline as well. The Molina Center believes that an economy driven by clean energy grows in all sectors, except oil and gas, of course. The center estimates that incremental investment in energy infrastructure can create between 300,000 and 550,000 jobs by Ultimately, a diversified energy market will improve energy security and lead to a cleaner environment for Mexico. Marc Diaz, NatureVest (Nature Conservancy) The Nature Conservancy, founded to preserve the world s land and water, is the largest organization of its kind and has been active in Mexico for several decades. NatureVest is the conservancy s impact-investment unit. The central idea of NatureVest is that capital markets, businesses, and governments must invest in nature as the long-term capital stock of a sustainable, equitable, and more efficient economy. To achieve its mission, NatureVest sources and structures investment products that support the Nature Conservancy s global strategies, raises capital for these investments, and shares knowledge and experience with the investment and conservation communities. In selecting opportunities, the NatureVest team looks for transactions that align with the conservancy s strategies, and cash flows that create a critical role for impact capital. A current project in the Yucatan Peninsula provides an excellent example of how NatureVest helps enhance the value of the land while promoting sustainable farming practices. The organization is working with cattle farmers in three Mexican states in the region. The goal is to prevent deforestation as the farmers move from one area to another and clear the land for grazing. The farmers longstanding practice may be a short-term gain, but it is a long-term loss because it depletes the quality of the land. To counter this, NatureVest is introducing sustainable farming techniques such as enhanced feed, fencing, and using potable water. These practices increase the quality of herds and their market value while they reduce the farmers need to cut down trees for grazeland. As part of this project, NatureVest engages and organizes both public and private participants across the value chain, including those seeking high-value, high-quality investments in agriculture. The organization connects people who make their livelihood from the land with producers looking for higher quality product. The result is a framework that lets all capital actors participate and connect to a system of mutual benefit. 6

7 Brian Cox, MFX Solutions MFX Solutions is a socially oriented company that supports impact investing with affordable hedging products and risk management. It works with an estimated 70 funds in 45 markets and has handled nearly $1 billion in loans so far. MFX s goal is to help investors manage the risk of making loans in developing markets where currency prices are often volatile. Most of its debt-side activity is international. Through its work with various Latin American countries, MFX Solutions has noted several areas where Mexico could benefit from reversing several of its disadvantages for social investors. For example, Mexico is not nearly as attractive as Peru, which, with a much smaller population, has $12 billion in microfinance loans outstanding, whereas Mexico has $5 billion in such loans. This imbalance may be due in part to the limited availability of microfinance lenders in Mexico. Latin America s largest microfinance bank, Mexico-based Banco Compartamos, dominates; a small number of other consumer-finance companies have entered the market, and while some call themselves microfinance lenders, they are not offering these loans to customers who need them. This lack of options has contributed to lending rates that are higher in Mexico than in many other Latin American countries. It is interesting to note that Mexico s higher labor costs also have deterred investors. Cox noted that Mexico s lack of an established system for nongovernmental organizations (NGOs) based outside the country holds it back as well. NGOs have been an important source for connections to microfinance since its early days. Yet, NGOs have not regarded Mexico as a developing country in need of such financing due mainly to its dual economies its more modern economy tends to shroud the realities and needs of its developing economy. To bridge these gaps and attract more investors, Mexico could apply its experience in successfully reforming its energy sector to other industries, from telecommunications to microfinance. Replacing these sectors monopolies, and their oligarchic nature, with more open markets, would encourage competition and attract the investment that Mexico needs. Fernando Albertorio, Sunu, Inc. Sunu is an early-stage technology start-up with a social impact mission: to provide the next generation of assistive, wearable devices that bring independence and mobility to people with sensory disabilities. The company developed its first product, Sunu Band, for the 280 million people worldwide who are vision impaired. For these individuals, mobility is very difficult and social stigma is routine. In the United States, 65 percent of this population is unemployed, in large part because they cannot leave home without assistance. Sunu Band uses the same navigational technology deployed in the backup warning feature now offered in some automobiles. It is worn on the wrist and, thus, is inconspicuous, which reduces the social anxiety created by more obvious adaptive technologies. Albertorio and his team developed early prototypes of the Sunu Band during a community service project at a school for the blind in Guadalajara. The band immediately improved the lives of children there. 7

8 With more than 15 years of experience in developing sensors and adaptive technologies, Albertorio says that this is an exciting time to be a social entrepreneur. With the right kind of support, developing products such as the Sunu Band is entirely feasible and so are the widespread social benefits they can bring. Sunu Band is a case in point. It is made widely available and affordable, thanks largely to the company s go-to-market strategy, which entails partnering with organizations worldwide that serve the visually impaired. Sunu is based in Guadalajara and Boston, where the city s unique mix of investors, academia, and well-known competitions for innovative start-ups have been a valuable resource. Albertorio is a member of the mentor network of one such competition and start-up accelerator, MassChallenge. 8

9 The Key Takeaways The main messages developed during the event include the following: Impact investing is a growing trend and is most effective when stakeholders from the private and public sectors collaborate. Two major policy shifts in Mexico the General Climate Change Law and its more recent energy reform legislation created impact-investment opportunities related to energy independence and environmental improvements. The impact-investment environment in Mexico would benefit significantly if the country opened other sectors, particularly financial services, to increased competition. There is a movement toward governance and establishing standard protocols for crossborder investment that would streamline processes for impact investing and enhance transparency. Educating potential investors, governments, and the public is essential for successful impact investing, yet it drives costs higher, so it must be considered when planning any project. 9

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